NFLX Soars 37%: Five Upgrades, Targets Zoom; AMZN, GOOG Bear Watching

By Tiernan Ray

Shares of Netflix (NFLX) are up $38.27, or 37%, at $141.53, after the company last night beat consensus estimates for its Q4, reporting a surprise profit per share, and projected this quarter’s results higher as well.

During the company’s typically customarily bizarre conference call with analysts following the report, in which CEO Reed Hastings makes no prepared remarks and answers questions submitted in written form, the topics ranged from things such as mobile usage (tablets, smartphones, etc.) of Netflix’s streaming service to the exclusive content deal with Disney (DIS) announced last year.

One analyst asked if the Disney deal, being “expensive,” would divert dollars from other content efforts.

“Well the way pay one deals work is you pay per film, and so they’ll flow in 2016 that would hit in the second half of 2016 are relatively small in total payments, and you don’t really get a full load of the payments until 2018,” said Hastings.

“So it’s a long way off. We’ve got a lot of content to look at between now and then in terms of what generates the most viewing and satisfaction, and a lot of flexibility to build the best service that we can by that point.”

Price targets and estimates are going up all around, and the stock received multiple upgrades this morning, from JP Morgan, Lazard Capital, Morgan Stanley, Raymond James and Macquarie, though Credit Suisse cut its rating on the shares to Neutral. Price targets and estimates are going up all around.

Lazard Capital’s Barton Crockett raised his rating to Buy, with a $200 price target, writing that “4Q12 metrics looked very solid globally, while new originals look poised to drive a dramatic step up in content visibility in 2013.”

Crockett gives a run-down of the positive stats from the report:

Domestic streaming sub adds of 2.05M to exit with 27.1M were a new high, while dom. stream. contrib. margin of 18.5% rose 210bps q/q, trouncing guidance for long-term 100bps q/q growth. Subs in int’l streaming and domestic DVD also beat, driving EPS of $0.13, vs LCMe of $0.02, guidance high end of $0.04, and consensus for a loss of $0.12. Domestic streaming marketing costs fell 25% y/y, while sub growth accelerated, as U.S. consumers liked the service more. Strong early adoption in recently launched int’l markets including the U.K. and Nordics suggest that the U.S. success, over time, is likely to be repeated in many markets overseas.

He also is chipper about the original content that the company is developing:

Netflix’s new originals slate seems to be generating interest on par with the highest profile launches on premium networks — notable, as originals drive premium net sub growth. Our checks show that LTM news articles citing Netflix original House of Cards (debuting Feb. 1) outnumber every current, major premium network show except HBO’s Game of Thrones. Arrested Development Season 4 (debuting in May) is on par with any show on Starz’ slate and near those on Showtime.

Crockett raised his estimate for this year to $299 million in revenue and $1.57 per share in profit from a prior $167 million and 19 cents profit.

On a somewhat less ebullient note, Raymond James’s Aaron Kessler raised his rating on the stock to Market Perform from Underperform, writing that “While we continue to have some longer-term concerns over U.S. streaming sub growth, the significantly improved operating margin outlook makes us more positive on the shares.”

Among the continued negatives in the Netflix story, for Kessler, is that “Cost of revenues was 2% above our estimate and represented 73.6% of revenues vs. 73.2% last quarter and 65.7% a year ago.”

William Blair & Co.’s Ralph Schackart reiterates a Market Perform rating on the stock, writing that the sharp rise in the stock is not properly reflecting the risk to Netflix from Amazon.com (AMZN) and Google (GOOG) that still lurks:

Shares of Netflix are up about 38%, to $143, and trade at an enterprise value of 31.2 times our new 2013 EBITDA estimate. In our view, shares are up so steeply because of better‐than‐expected subscriber metrics across the board in both the quarter and management’s outlook. Acknowledging the solid quarterly results and future guidance, we believe adding $2.35 billion in enterprise value based on the results is premature, as we continue to be concerned 1) whether management will realize an adequate return on its international investments and 2) that content costs will increase as Amazon (AMZN $273.00; Outperform) makes a larger move into the market to drive Prime memberships and Google (GOOG $747.00; Outperform) is yet to fully monetize its YouTube Channel and premium content strategy.

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JANUARY 24, 2013 12:10 P.M.

DaveW wrote:

Analysts look at AMZN and YouTube as competitors, but they really aren't. AMZN has a totally different presence in the entertainment delivery market that NFLX has. People will sit in front of NFLX all evening long, while AMZN doesn't even attempt to capture the viewer in any persistent manner. AMZN is focused on selling, using the Prime membership as a loss leader. NFLX is focused on establishing a long term loyal viewership base - and they are succeeding beyond all expectations and across ALL global markets.

As a result, there are almost no SMART TVs or TV-Internet devices which do not have a prominent Netflix menu item, while AMZN and YouTube are barely there at all. The current profit numbers translate into the cash flow that Netflix needs to sustain its strategy. This is why the stock price has jumped; people had been thinking that NFLX had a good idea but cash flow would impede execution. Cash flow is no longer a pressing concern and this will build momentum as NFLX will have the muscle to sign new content deals.

Carl Icahn is happy this morning, but no signs yet that he is taking any profit.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.